Amid Pandemic Stress, Vietnam’s Public Finances Outperform Peers: Fitch Ratings

Strong export growth and a successful campaign to contain the spread of Covid-19 have supported Vietnam’s economy through the pandemic and allowed the government to adopt a restrained fiscal policy response, says Fitch Ratings.

These factors have contributed to upward pressure on the sovereign’s rating, reflected in our decision to revise the Outlook to Positive, from Stable, when we affirmed the rating at ‘BB’ on 1 April.

Vietnam’s public finance metrics have improved markedly relative to peers since the start of the pandemic. In December 2019, prior to our April 2020 decision to revise the rating Outlook to Stable from Positive amid uncertainties associated with the pandemic, we had expected that Vietnam’s general government (GG) debt/GDP would stand at 40.3% of GDP in 2021, against a median of 41.7% for ‘BB’ sovereigns and 43.8% for ‘BBB’ sovereigns. We now expect Vietnam’s GG debt/GDP to average around 39% in 2021-2022, but the equivalent peer median forecasts have risen to around 60% and 58% for ‘BB’ and ‘BBB’ sovereigns, respectively.

Vietnam’s General Government (GG) Fiscal Metrics Improve Relative to Peers

Note: Vietnam data are as of April 2021; data for ‘BB’ and ‘BBB’ sovereign medians from Fitch’s March 2021 sovereign data comparator
Source: Fitch Ratings

The improved fiscal position reflects Vietnam’s broader economic strength. Tourism earnings have been severely hit by the pandemic, but other parts of the economy have proved robust. Vietnam was one of only a few countries globally to post positive economic growth in 2020, of 2.9%. Growth was buoyed by external demand, with goods exports rising by 6.9%. Domestic activity was also supported by the limited spread of Covid-19 in the country. Just 1,465 cases and 35 deaths from the virus were officially recorded in 2020.

We expect growth to remain strong, at around 7% annually, in 2021-2022, buoyed by continued export expansion and higher investment. A pandemic fiscal package covering 2020-2021, worth about VND292 trillion (about 3.6% of 2020 GDP), will reinforce growth prospects.

Goods exports rose by 23.8% yoy in 1Q21, supporting real GDP growth in the quarter of 4.5% yoy. Vietnam is benefiting from trade diversion associated with US-China trade tensions, new trade agreements such as the EU-Vietnam Free Trade Agreement and the Regional Comprehensive Economic Partnership, and Vietnam’s cost competitiveness. Rapid increases in public infrastructure investment and FDI should bolster the sustainability of strong medium-term growth.

In our April assessment we indicated that sustained high growth that reduces Vietnam’s GDP per capita gap against its peers while maintaining macroeconomic stability could put upward pressure on the sovereign rating. Upward pressure could also stem from sustainable fiscal consolidation, a reduction in contingent sovereign liabilities, or improvements in banking-sector capitalization, transparency and regulation.

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Vietnam’s generally robust economic outlook remains subject to risks. Its vaccination program has moved slowly, beginning only on 8 March. Vaccine hesitancy among the public appears low, which is a positive sign, but Vietnam’s confirmed vaccine orders cover a lower proportion of the population than in some neighboring states, such as Indonesia and Malaysia. Should the country experience a major Covid-19 outbreak before vaccines are widely rolled out – prompting lockdowns – growth prospects and public finances could be affected.

Exports could also be vulnerable to shocks. Vietnam was designated a currency manipulator by the US Treasury last December. Our expectation is that the two sides will engage in discussions to reduce tensions over the issue, but if the US were to escalate the matter it could damage Vietnam’s growth prospects. Vietnam’s goods exports to the US in 2019 were equivalent to around 27.5% of GDP.

Vietnam’s rating will also continue to be weighed down by governance factors, which remain weaker than the ‘BB’ peer median, although they have improved in recent years. The country scores particularly poorly on voice and accountability in the World Bank’s governance indicators.

Source: Fitch Ratings

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